The USS changes affect rank and file members disproportionately
In a previous post I showed how to calculate the cost of making up the loss of benefits under the proposed changes to USS using HMRC's method for valuing contributions to a defined benefit pension scheme. For those calculations I covered salaries up to the current salary "cap" of £55,500. In this post, I extend the calculation to cover colleagues whose salaries exceed the cap, right the way up to VC or Principal levels showing that the proposed changes are actually neutral for salaries around £250,000!
Above the salary cap, employers currently pay 12% in defined contributions while members pay 8%. Under the proposed changes, the member contribution will remain the same while the the employer contribution will rise to almost 13.25%. Contrast this system with e.g. the NHS pension scheme where the ability to pay for benefits is factored in and the higher salaried members pay up to around 15%. The effect of the different contribution rates can be seen in Figure 1. Above the salary cap, the increased employer contributions above the cap mean that the lines start to converge.
|Figure 1. The annual value of pension contributions. The graph shows the values of the annual contribution to a pension under the proposed USS scheme (DC, actual), the current USS scheme (current, HMRC method) and the current scheme including the employer's 1% "match" (current+M). Under the "match" you actually contribute another 1% on top of this.|
Mid ranking salaries worst hitYou might expect that the proposed changes would share the burden of fixing the apparent problems with USS progressively based on the ability to pay, or at the very least equitably. In fact, as can be seen in Figure 2, which shows the additional annual contributions you would have to make to buy the lost pension benefits, the pain falls unequally on members whose salaries are below the salary cap.
Figure 2 The difference in annual value of the proposed (DC) and current USS pension schemes without (current) or with (current+M) the "match".
|Figure 3 The difference in annual value of the proposed (DC) and current USS pension schemes without (current) or with (current+M) the "match" expressed as a percentage of salary.|